I’m having some difficulty finding a hook for commenting on Joseph Michael Newhard’s defense of income inequality at the Foundation for Economic Education. The best I can come up with is a series of counter-punches. For example:
People don’t maximize income; they maximize utility. If college students only cared about maximizing income, they would all major in petroleum engineering.
That’s factually incorrect. There are just a handful of programs in petroleum engineering in the entire country, they all have limited enrollments, and they’re all highly selective. In other words market and preference aren’t determining the number and wages of petroleum engineers. Artificial scarcity is.
And I challenge his notion that people major in lower-earning fields by preference. They do so because they can’t cut it in the highly competitive highly remunerative and for good reason. A very high percentage of people who enroll in college just aren’t college material. Only about half of people who enter college these days actually graduate with a degree over six years.
Or how about this? Wages aren’t determined by productivity. The most productive person with the title “business analyst” at Big A$$ Incorporated earns just about the same as the least productive person with that title. Your wages are determined by your position in the organization and the wages of people whom you resemble superficially, not by your own productivity.
When I graduated from college (before the glaciers descended and dinosaurs ruled the earth), a CEO of a major company earned on average 17 times as much as the average workers in his company (in France it was 13 times). Today major company CEOs earn 350 times what his average worker does. That can’t be explained by productivity, a failure to apply oneself, or anything other than cooperative boards of directors.
The reasons we should be concerned about increasing income inequality is that, at least in the U. S, income inequality leads to social inequality and income is increasingly running in family lines. That means a stratified, class-based society. That isn’t the United States I grew up in or the U. S. that I want.
Do I believe in strict income equality? Of course not. But there’s got to be something between the crony capitalism-based inequality we have now and Soviet-style enforced equality in which everybody but the party bosses are equally poor.
You’ve just demolished the hypothesis that incomes are determined by marginal productivity, which has dominated economic policy for the last four decades.
It’s actually easier than that. Something between 15% and 25% of all of those in the top 1% of income earners are physicians. Their incomes have increased by a multiple in real terms over the last 40 years. Their productivity, measured in terms of anything other than incomes, are about the same as they were 40 years ago.
Here’s my plan. Dave gets to decide. The first 100,000 case files will be delivered to Dave on Monday.
Actually, this is factually incorrect:
“This is factually incorrect. There are just a handful of programs in petroleum engineering in the entire country, they all have limited enrollments, and they’re all highly selective. In other words market and preference aren’t determining the number and wages of petroleum engineers.”
Engineering is notorious for flexing their offerings and class sizes for what’s in and out. It was true when I was in school, its true know. I know, I give money to the school and get to talk to them.
However, this is absolutely spot on, especially if modified:
“They do so because they can’t cut it in the highly competitive highly remunerative and for good reason. A very high percentage of people who enroll in college just aren’t college material.”
Or aren’t material for a particular curriculum. A good civil, aeronautical, electrical or mechanical engineer might not be a good ChemE or Metallurgical engineer. Personally, EE flummoxed me. The math and circuit design did not make sense, even though I scored in the highest echelon on math in standardized exams. I switched majors. Actually, I HAD to switch majors. Chemistry, physical chemistry, I could do in my sleep. I can get down eyeball to eyeball with crystal structures and all that implies for the branch called mechanical metallurgy. Its so easy.
This isn’t just a trip down memory lane. It points to the issue of income inequality. If I had slugged it out, I would have been a pedestrian EE. Lower income. If I’d stayed a MetE, I’d have done fine, but the business worlds view of my utility would have said, upper middle class. Roy’s tongue in cheek comment actually gets to an essential point. The market will tell you your worth. It will fail (the economist’s “market failure”) if you have monopoly power/regulatory capture (medicine) or governance failure (CEO salaries, although that’s between the owners and the employees) or a significant segment of society who is self-suboptimizing. (the non-college worthy types Dave refers to.)
As Abe Lincoln is supposed to have said “you cannot help the poor by harming the rich.” All the misguided attempts to address income inequality seem to be, well, misguided. But politics being what it is, don’t look to them for anything but continued income inequality.
I checked that some time ago. There are just a handful of programs in petroleum engineering around the country, fewer than 10 IIRC, more programs aren’t being created, and the existing programs aren’t expanding to allow more students.
BTW, I’m not putting anybody down when I say that some people aren’t college material. I wouldn’t make a good professional NFL quarterback and no amount of determination or dedication would change that. Some people wouldn’t make good physicians, some wouldn’t make good engineers, others would. Pointing out that people differ in their abilities and temperaments isn’t a put-down.
I’ve met people who are highly intelligent yet far better suited for an autodidactic education than a formal one. They tend to suffer in a culture as consumed with credentialism as ours, even though they’re usually twice as good as anyone else.
That’s something I’ve noticed as well Ben. Credentialism also punishes generalists.
Example: Michael Reynolds
IMO formal education is worse than useless for most highly intelligent people. It just holds them back. Higher education is also not particularly worthwhile for those at the lower end of the intelligence scale. Whom does it help? People who are between one standard deviation below normal to about two standard deviations above normal.
Example: me
I know you aren’t putting people down, Dave. That would be unlike you. People have different talents, and lord knows we’ve purchased a few businesses from street smart street kids.
Separately, they are all chem e’s Dave. Petroleum was hot in the 80’s and almost the entire Purdue class went into oil exploration and refining. U of I has a similar track record. It’s not just those labeled Petroleum Engineers and it’s not restricted. But it is a rigorous curriculum inaccessible to many. You bring up Reynolds. He wouldn’t have a chance graduating or prospering in Chem E. But he can be creative and he can write. And the market rewards it. And that’s just fine.
A friend from school had a masters degree in Petroleum Engineering, and so I have a slightly different response to the quote. I don’t know whether a master’s degree was an example of over-credentialing, but after 5-10 years he took his savings and went to law school. Two things I remember: First, a lot of unpleasant time spent on oil platforms in the ocean, particularly at the start. While ocean platforms are not involved in all petroleum operations, I do wonder if the reality of drilling locations these days necessitates a hazards premium. Second, he started in the early 80s before the oil bust, and jobs and opportunities for those who had them had ceased to exist. Again, I wonder how boom-bust cycles impact payscales.
My friend had a Civil Engineering bachelor’s from Purdue. So, I suppose if a lot of engineers were rushing into oil exploration and refining in the early 1980s, that does encourage credentialing to provide a distinction.
There’s an additional problem with his claim. It doesn’t take into account the effects of supply and demand. Presently, according to the Department of Labor there are about 33,000 petroleum engineers. All of the programs in the country add a few thousand to that annually.
He’s assuming that if a significant of those graduating from college annually got degrees in petroleum engineering, it wouldn’t affect the wages of petroleum engineers. 1% of those graduating from college means 18,000 new petroleum engineers. I think it would affect wages.
““They do so because they can’t cut it in the highly competitive highly remunerative and for good reason. ”
There are a goodly number of people who are bright enough and competitive enough to succeed in professions that pay more, they are just interested in other things.
Steve
I guess it depends on your operative definition of “interested in other things”. For example only the top 15,000 or so applicants to med school are accepted, the rest are not whether they’re otherwise qualified.
My point is that I categorically reject the notion that we’re in the middle of the “Great Vacation”. I don’t think that people have stopped working because they’re lazy or uninterested.
Like what?
I’ll grant you that most physicians have the ability to be dentists but on average dentists earn less. Some dentists have the ability to be physicians but couldn’t get into med school (I know quite a few dentists who applied to med school but couldn’t get in).
MBAs from top programs earn a lot but those are highly selective. Most earn much less. The same is true of the practice of law. You can earn a lot but most of those who do are graduates of highly selective top schools.
Can you give me a concrete example of a job that is highly compensated on average and incomes have a low standard deviation (i.e. the average doesn’t misrepresent the typical wage) in which jobs for which there are qualified applicants go unfilled due to preference? I think it’s a mythical beast.
In practice I think there are many, many more people who are holding down jobs that pay a reasonable amount for what they are but for which many of the people who are holding them are in fact overqualified.
Short version: I think that we’re not creating enough jobs that pay a couple of standard deviations more than median for the people who could handle those jobs is a bigger issue than people not taking jobs that pay the median income because they prefer them is.
I taught engineering for 37 years, two at Union College in Schenectady and 35 at Ohio State Univeristy. The engineering college at Ohio State was semi-selective, but we tried to get as many students as we could. Petroleum engineering, like chemical and computers, was more selctive than civil (my discipline), but there was NO NUMERICAL LIMIT any where. The statement that petroleum engineering has very limted enrollments is false at every school. Every program gladly takes everyone with the required grade point average.
The fact is that only a few percent of the students at any university or college has any interest in engineering. Engineering per se is a major turn off for the great majority of freshmen. Engineering and engineers are just too weird for most people.
You are right that most college students don’t belong in college, and most don’t want to be there. About two-thirds (or more) of undergraduates should be dismissed, and they would have better lives if they were (no unproductive debt). At least three-quarters, or maybe 90%, of graduates students should be dismissed. The great majority of liberal programs should be shut down.
Been reading a book while waiting in line at the grain elevator. Wealth&Poverty by George Gilder. He makes a pretty good point regarding income inequality, It looks very bad as a snapshot in time, but as years, decades, and generations pass, fortunes fade and fortunes are made. The very wealthy are necessary to finance ventures that may flop or succeed wildly, increasing the common wealth. We need the poor, (not starving, just unsatiated) for their drive and ambition, because a very few of them will be the successful entrepreneurs of tomorrow, raising common living standards further.
I think the obvious example of what I cite is housewife/husband. Many are bright enough to hold high paying jobs, but they opt to stay home and take care of their kids. They value that more than working. For some it isn’t much of a choice as they might not make enough to afford child care, but there are a lot of very bright, sometimes well educated people, who have made that choice. (My favorite was a friend of the wife who finished first at Harvard Law, but wanted to be a dancer instead, which doesn’t pay all that well. Funny thing was that he ended up being a moderately famous lyricist by accident.)
Within medicine, since you brought it up, some of the brightest people choose primary care jobs that don’t pay as well as interventionists make. Trust me, the people who go into orthopedics (the high paying specialty now) aren’t all the brightest.
PD
Oil platforms. Middle Eastern countries. Heavy travel. Dirty work. When I graduated the highest paid engineers that year were, wait for it, Metallurgical engineers. The princely sum of $22k.
Oh, except for the Chem Es. A roommate went to work for Schlumberger on one of those platforms. He made $50k a year.
Bob
Yes, the notion of restricted admissions is weird. My class was probably only 15-18 people. They would have taken more. Disciplines like ME, CE and EE was where the volume was.
I’ve always found the egghead engineer meme overdone. Perhaps reserved and analytical, but not weird. Another of my roommates was a CE and went on to become CEO of a mid-sized commercial construction company. Not too weird. And so on.
The current rap on technical fields is the Indians. Put them in a corner and have them write code.
If this is true then we should periodically confiscate all wealth to force the rich into entrepreneurship.
Ben, the point is, all wealth IS confiscated. By tax, by death, by dozens of worthless heirs, by bad investment schemes. Again, you used the word “periodically” Time passes, people age and die, their children squander their wealth, and new, unexpected people we’ll be too long dead to ever meet will create new wealth, that will advance the prosperity of all, if we are wise enough not to kill the Golden Goose of Property Rights and free enterprise. Think long term. Past our lives.
1) You’re moving back and forth between generational and intergenerational wealth.
2) Someone blowing it all in Vegas isn’t confiscation; neither are taxes when it’s pretty well established historically one’s returns on capital grow faster than the rate of taxation or rate of economic growth.
3) There has never been a right to property. If there were the government would have to confiscate all capital and redistribute it so everyone has it.
4) Money doesn’t come from rich people, it comes from the state. The rich are the people who are most successful in collecting and hoarding it.